The Markets and the Quest for the Yellow Jersey
The Tour de France is a sporting spectacle and absolute examination of fitness, but it can also teach us a great deal about the art of investing
Too Long, Didn’t Read? Quick Highlights:
We find that by observing the Tour de France, and the elite cyclists that compete in it, investors can apply certain respectable traits to improve their own capital allocation process.
The Tour de France is a grueling test that puts athletes through a 3 week gauntlet of pain. The most dominant cyclists have a keen ability to push through immense levels of suffering and at times injury. Similarly, the capacity to deal with pain allows investors to make increasingly rational, logical, and less emotional decisions. While there are elements of pain tolerance that may come from genetic wiring, we believe that proper conditioning can help investors heighten their pain tolerance.
While the Tour de France is an individual competition, it is assuredly also a team-based event. Any champion rider would admit that without a championship team, they would not be able to hoist the yellow jersey at the completion of the final stage. Although it is a bit different in application, we believe the best investors have a team oriented mindset. Actively seeking out the right mentors/peers can make all the difference.
Emphasizing controllable inputs and not being focused solely on outcomes allows cyclists and investors alike to develop repeatable winning strategies.
The Tour de France, A Pinnacle of Endurance Sport
“There is something magical about the tour… People talk about the Olympics, it’s nothing compared to the Tour as an event.” – Greg LeMond, “Slaying the Badger”
Very few sporting events, if any, match the history, intensity, and insanity of the Tour de France.
For the uninitiated, the race is an annual men’s professional multiple stage bike race hosted primarily in France. It consists of 21 day-long stages and is by far the most difficult bike race in the world and possibly the most demanding sporting event on earth.
The first tour was held in 1903 to promote a national French newspaper, with only 21 of 60 total riders finishing. The next two decades saw the race gain prominence as it became known as the world series of cycling. Over 3 weeks long, the race covers most of the country and riders compete in teams, with each team’s sponsor name visible on the rider’s jersey. The rider who covers the overall distance (~2,500 miles) in the shortest time is declared champion and wins the yellow jersey on the final day of the race in Paris.
To gain an appreciation for the rigor of the Tour, it is appropriate to make some rough comparisons for perspectives sake. For the average person, the best way to capture the Tour’s brutality is to compare it to either long distance running or riding a Peloton bike. In terms of running, think of each stage as a marathon, which would roughly equate to an individual running 26 miles per day for 21 days straight. If you’ve ridden a Peloton bike, imagine maintaining the all-out intensity of a 30 minute ride for 6 hours straight and repeating that for 21 days.
“It is arguably the world’s most difficult athletic event…It’s 21 days, over 2,500 miles, and some of the world’s most punishing roads. It’s like running a marathon every day, for 3 weeks.” – Tyler Hamilton, “Lance”
Not only is the length of the race grueling, but the terrain is among the most strenuous on earth. In this year’s race, only 8 of the stages will be flat, with 5 stages being considered hilly (steep), and 6 stages described as mountainous (very steep). The 2 other stages are time trial stages, which are essentially all out sprints for ~30 miles that encompass hilly, flat, and undulating sections.
This type of terrain not only places severe strain on a rider’s system, but is also quite dangerous since high speed is involved. Even proper training isn’t enough to avoid disaster, as crashes can be so dangerous that some have proven to be lethal.
The Tour de France is the ultimate test of endurance, strength, power, mental fortitude, and strategy. In more simple terms, the race is an absolute freak show of fitness and mental strength. To gain an appreciation of how special professional cyclists are, consider how an average* rider stacks up to Tour pros.
*That person you know whom is obsessed with cycling, has been biking for years, may in fact be referred to as a freak athlete in your local community, and may even compete in various national races…they are most likely considered average
Average Speed on Flat Terrain:
Average* Rider = ~17mph
Tour Pro = ~27mph
Maximum Sprint Power:
Average* Rider = ~700 watts
Tour Pro = ~1,350 watts
Average Resting Heart Rate:
Average* Rider = 60 - 100bpm
Tour Pro = ~40bpm
Perhaps the single most humbling comparison between average cyclists and tour professionals is how long it takes each to climb up the “Col du Tourmalet.”
This famous section of the race is one of the highest paved mountain passes in the French Pyrenees and lays claim to a 4,600 foot climb with an average grade of 7.5%. An average rider with decent fitness would most likely complete this section in two hours, whereas the top climbers in the tour would finish in one hour while averaging anywhere from 350 - 375 watts (turn on a Peloton power meter and see if you can even produce this figure!).
Now that we have developed a certain appreciation for the Tour and the masochists that compete in it, we will cover a few key traits that we believe elite riders share with world class investors.
The Ability to Deal with Pain
All endurance athletes, but especially cyclists, subject themselves to extremely prolonged periods of activity and strain. These extended sessions of exertion produce immense levels of pain, which is manifest in the form of physical and mental suffering. The ability to tolerate pain is vital for strong performance throughout the amateur and professional ranks and it is often thought that those whom can tolerate the most pain have the best chance of consistent success. Suffering is so deeply accepted, and welcomed, in the cycling world that even the most legendary riders have opined on its place in the sport.
“Cycling is suffering” – Fausto Coppi
“Cyclists live with pain. If you can’t handle it, you will win nothing. The race is won by the rider who can suffer the most.” – Eddy Merckx
“To be a cyclist is to be a student of pain. At cycling’s core lies pain. If you never confront pain, you’re missing the essence of the sport.” – Scott Martin
Some cyclists have taken the concept of pain to extreme levels by pushing their bodies to limits that would be warranted dangerous by most. In 2013, Geraint Thomas continued to ride after fracturing his pelvis in the early stages of the Tour de France. The pain was so excruciating that he was routinely lifted off his bike by team attendants at the end of stages. The injury was severe enough for Thomas to end up in the hospital, but after learning that the fracture wasn’t expected to worsen, he decided to push through the pain and ultimately finished the race.
Perhaps the most interesting element of pain is that there is no real way to measure it despite loads of data and advances in training technology. The most accepted measurement is lactate concentration in the blood, which coincides with discomfort, but there has never been a proven connection between lactate concentration and the ability for an individual to handle pain.
While suffering seems to be something that every cyclist goes through, the nature of suffering is that of a personal game. Athletes deals with pain in various ways, and their ability to handle suffering differs dramatically. It seems logical that there is a genetic component tethered to dealing with pain, and perhaps some are simply born with the ability to suffer more than their peers. It is also plausible that proper mental and physical preparation allows athletes to continually increase their pain threshold. Any amateur endurance athlete can improve their ability to push themselves and deal with discomfort via consistent, and intensified, training.
In reality, it is mostly a combination of both genetic wiring and proper training that allow elite cyclists to push through far more pain than the average rider. But it is almost certain that elite riders are able to place themselves in a frame of mind that allows them to deal with high levels of pain and find comfort in being uncomfortable. In fact, most of the Tour de France is spent in extreme physical and psychological environments as opposed to a “happy medium” type domain that would be analogous to more casual rides.
This idea of being able to tolerate pain translates to investing in a rather direct manner since loss, temporary and permanent, can generate tremendous amounts of anguish. Public markets can be thought of as a pendulum that spends time swinging between good times and bad times, but spends most of its time away from the middle of the swinging arc.
Howard Marks provided an excellent perspective on this point in his 2004 memo “The Happy Medium”:
“The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward the extreme itself that supplies the energy for the swing back.”
When the market pendulum is at the good side of the spectrum investors typically have feelings of euphoria, confidence, and greed. It is when the pendulum swings to the other side that feelings of fear lead most investors to panic, which typically results in psychological pain leading to loss via the selling of securities. It can be observed in today’s market environment that there has been a certain pendulum swing among high growth technology names, as the past two weeks have resembled a period of rather consistent loss. While we only can speak with a certainty to our own strategy, it can be generally observed on certain social media forums that fear and panic have started to penetrate the mindset of some investors.
This is not conjecture on our part. Anyone who has studied for the CFA exams will know this concept well, as behavioral economics teaches us that the average person tends to put much more weight on portfolio losses than gains. This psychological tendency is known as loss-aversion and in its simplest form validates that most people have a difficult time dealing with pain.
Daniel Kahneman and Amos Tversky discovered this tendency in 1979 and detailed their findings in their paper Loss Aversion in Riskless Choice: A Reference-Dependent Model.
They describe loss-aversion as an emotional bias humans face when analyzing risk. The summary is that attitudes towards risk are defined from a fixed reference point and this value function is asymmetric which implies that people will feel a greater impact from a loss than from gain for the same variation in absolute value.
Their study concluded that on average, people display a loss aversion ratio of 2.5, meaning that when identical monetary gains and losses are compared, the average investor will value the loss up to 2.5 more times than the gain.
Pain hurts, and for most people it is difficult to adapt a rational process during market crashes. During such volatility, investors typically react with emotion since it is difficult for most to see net worth, and/or managed assets, diminish in real-time. In these situations, the mind typically deals in extremes and investors sell holdings for a loss as they are incessantly tugged by rather powerful psychological forces.
This attempt to make a “good trade out of a bad situation” is driven by the intention to shelter the mind from pain, but in reality, generally causes long term economic damage assuming that volatility causes investors to sell quality assets.
Investors can learn to combat this pain and make better decisions by taking a long term approach and planning for the future. Fred Liu, founder of Hayden Capital, has a requirement of everyone who invests money in his fund:
I promise you, one day your portfolio will be down 50%. Peak to trough, I guarantee it to you. You have to be mentally prepared for when that will happen and be emotionally stable enough to know that going in and how you will react when this situation occurs.
While prudent investors don’t need to be experts in behavioral economics, it is imperative that they have a general understanding of the dynamics of volatility and risk, which are associated with the emotion of fear and pain. Warren Buffett has touched on the importance of this subject for decades, but perhaps was most undeviating on its importance during the 2020 Berkshire Annual meeting:
“You’ve got to be prepared, when you buy a stock, to have it go down 50% or more and be comfortable with it as long as you are comfortable with the holding. And I pointed out a year ago, maybe two years ago, in the annual report that there have been three times in Berkshire’s history when the price of Berkshire’s stock went down 50%, three different times.
There wasn’t anything wrong with Berkshire when those three times occurred, but if you’re going to look at the price of the stock and think that you have to act because it is doing this or that, or somebody else tells you ‘how can you stay with that when something else is going up?’, you’ve got to be in the right psychological position.
And frankly, some people are not really careful, some people are more subject to fear than others. It’s like the virus, it strikes some people with much greater ferocity than others and fear is something that I really never felt financially, and I don’t think Charlie has felt it either. Some people can handle it psychologically, if you can’t handle it psychologically then you really shouldn’t own stocks because you’re buying and selling at the wrong time.”
Buffett isn’t the only investor that holds this view, as many others have relayed that the ability to take pain is imperative for long term success. William Greene, in a talk he gave at Google a few years back, touched on four main takeaways he gathered after spending years studying great investors:
“So [Bill] Miller said to me at one point, that if you did a brain scan of the greatest investors, he said, he’s pretty convinced that you would find that the greatest investors are actually wired differently than the rest of us…. That the part of the brain that processes say the fear of loss or pain of loss, is actually kind of stunted in them. And I think that you can see this in people like [Warren] Buffett, that they are extremely unemotional; you see it in [Howard] Marks as well.
If you want to be long-term successful as an investor you need to pay attention to the need to build emotional resilience. This is a really important point that I think particularly people forget when we’re going through a good period. You tend to assume things will always be good and you tend to overreach during these good periods; we get full of overconfidence and hubris”
We agree that many of the legendary investors have been blessed with genetic wiring which helps them avoid feelings of pain associated with loss. But just as cyclists are able to properly train to increase their pain tolerance, we also believe that investors can build the resilience needed to act with reason and stoicism during periods of loss.
For us, such resilience comes from conviction born out of proper business analysis and due diligence. Properly understanding the business provides a high degree of confidence, which in turn leads us to be comfortable holding, and generally adding to, our positions during periods of fear and panic.
The Importance of a Team
The Tour de France is a rather interesting event, as it is an individual competition but the race is assuredly a team based effort. Most viewers are familiar with the individual names associated with the sport (Armstrong, LeMond, Hinault, Merckx, Induurain, Froome, etc.), but each superstar is supported by a team of elite riders who help position their team’s strongest cyclist to win.
Since the Tour is made out to seem like an individual competition, it becomes convenient to dismiss the importance of a team. Chris Froome, one of the sports all-time great champions, has won four individual yellow jersey titles, but during his championship run, he benefited from the best and most well-funded team in the history of the sport. An argument could certainly be made that without Team Sky, Chris Froome would have had a nearly impossible time amassing four victories.
Yellow jersey contenders need teammates that help them maximize their chances of winning by helping them expend energy as efficiently as possible throughout the race. Each Tour team is a rather complex machine that has many moving parts. Teams are made up of eight riders who ride the entirety of the race together, and in the following paragraphs we describe the most common types of riders on each team.
Yellow Jersey Contender – The rider who is positioned by each team to have the best chance of winning the yellow jersey (sometimes this can be multiple riders). Typically, the cyclists on top of the general classification at the end of the race, and those that tend to be strong climbers and time trialists. This makes intuitive sense, since the mountainous regions and time trial portions create a large time differential.
The Domestique – An assistant rider who sacrifices their chances of advancing in the general classification standings so that a teammate can succeed. These riders will typically ride in front of team leaders to cut wind resistance, gather water bottles from team cars to disperse to other team members, and even give up their bike if the team lead suffers mechanical failure. What is interesting is that any one person on the team may act in the domestique capacity during the race. For example, a climbing specialist may take this role if a sprinter has a chance of winning a stage and needs to ride with maximal pace.
Sprinters – These riders tend to be the fastest in terms of pure velocity, which is important since the largest block of the Tour takes place on relatively flat ground. While most casual fans are well acquainted with the yellow jersey, the green jersey is almost equally as respectable among riders.
This green jersey is given to the rider who earns the most points from stage wins and intermediate sprints. Peter Sagan is a famous cyclist whom is perhaps most well-known for never winning a yellow jersey but winning the points classification (green jersey) seven times.
While individuals end up with the ultimate glory in the Tour de France, it is asinine to think that the sole efforts of any one rider are what christen him champion. There have been very few instances, if any, where a single rider has been able to emerge victorious without the support of a dedicated team.
Although investing may not share the exact team dynamics of cycling, we believe that more often than not, great long-term investors are strengthened by a team dynamic, whether that be through direct partnership or proper mentorship.
Perhaps the most exemplary team dynamic in all of investing is Berkshire Hathaway. Warren Buffett gets credited with most of the success and over the course of his career has assuredly earned the “yellow jersey” of investing; but partner Charlie Munger has contributed tremendously to not only the success of Berkshire, but also to the cognitive progression of Buffett.
In fact, it was Munger whom indoctrinated Warren with the idea of buying wonderful businesses at fair prices, which differed from Buffett’s early and foundational Graham-based methodology of buying fair to poor assets at steeply discounted prices.
“Charlie made me focus on the merits of a great business with tremendously growing earnings power.” – Warren Buffett
“Once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses. And, by the way, the bulk of billions in Berkshire Hathaway has come from the better businesses. Much of the first $200 or $300 million came from scrambling around with our Geiger counter. But the great bulk of the money has come from the great businesses.” – Charlie Munger
Buffett and Munger, while not perfect, have proven through their team dynamic that a trusted system for authentic feedback and logical decision making is paramount for long term success. It is evident that Berkshire would not be what it is today if Buffett would have decided to go the road alone as opposed to bringing Charlie on as Vice Chairman in 1978.
“One plus one with Charlie and me certainly adds up to more than two.” – Warren Buffett, Working Together
Mohnish Pabrai, an investor whom we respect greatly, views the team dynamic in a slightly different light, but nonetheless values the core attribute. In a recent lecture he gave to students of Peking University, he mentioned the following:
“Charlie Munger told me, ‘you know, it’s always good to have somebody to bounce your investment ideas with, someone you can talk to about your investment ideas.’
So I said, ‘you mean like you had Warren?’
He responded, ‘I did not always have Warren. Sometimes I would discuss my ideas with somebody else. In investing it is really important, and the person you should discuss your ideas with needs to be a peer… If you can share your ideas with a peer who can be honest and candid with you, that is one way to avoid thinking everything looks like a nail. You know, you have to avoid making sure everything looks like a nail.”
Although we believe strongly in having a proper channel to form opinions and validate them, a team dynamic isn’t confined to a Buffett and Munger style partnership. Mentorship can be of tremendous benefit, especially in the earlier years of an investor’s career which tend to be the most formative.
It is evident that strong mentors typically produce quality junior investment managers, with some of these younger investors breaking off to start their own investment strategies. This mentorship phenomenon has been observed with Julian Robertson and Tiger Management, and more recently with Brad Gerstner and some of his employees who have left Altimeter. Mentorship is so salient that Stanley Druckenmiller has implied that it is perhaps the greatest blessing a young investor can receive.
“If you’re early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It’s not even close. And don’t even think about leaving that mentor until your learning curve peaks. There’s just nothing to me so invaluable in my business, but in many businesses, as great mentors.”
We understand there are plenty of investors who work in a singular fashion and produce fantastic results. It is our preference to work together as a team where we feel that the sum of the parts is greater than the whole.
The Importance of Tactical Operation and Focusing on Controllable Inputs
While the Tour de France measures fitness and endurance, it is possibly even more so a test of tactics and rider strategy. Champion cyclists are assuredly capable of passing the grueling physical tests imposed by the event, but they also have supreme tactical mastery which corresponds to decision making. Some champion riders are best suited for attacking on an uphill climb, while others have a natural ability to aggressively descend and attack on flatter roads.
The best athletes focus on making the right moves when the odds are in their favor. Riding the entire race all out is not only foolish, but more so impossible; not even champion racers have the necessary engine to maintain full blown riding stage after stage. The top champions know how to aggressively punch the gas at the right time, and these extreme periods of effort typically play to their core strengths, which in turn provide them with a higher probability of success.
“You can suffer as much as you want, if you do the wrong thing at the wrong time you will never win the race. You cannot compensate your stupidity by suffering more. First you must begin to do the right thing at the right moment, that’s the art of cycling.” – Paul Koechli
Bernard Hinault is a French cyclist who won the Tour de France five times and is widely known as one of the best riders in the sport’s history. Hinault was a superb all around cyclist and was strong in climbs, descents, and time trials. What made Hinault special though was his ability to view a race as a tactical game. He would often attack riders when they least expected it, which would create a mind game of sorts. In ESPN’s “Slaying the Badger” Hinault relayed the following:
“I was an instinctive rider. You had to be alert when racing against me. The slightest mistake, any lapse of concentration, would result in defeat.”
In 1986, Greg LeMond beat Hinault and became the first American rider to win the yellow jersey. LeMond was clearly the stronger athlete in that year’s race, but also employed an effective tactical strategy that consisted of counter attacking and conserving energy to chase Hinault down on the back half of various stages. LeMond was focused on employing aggressive tactics when the odds were in his favor, and didn’t let Hinault disrupt his overall plan.
Becoming a master tactician and being able to employ a consistent winning strategy is a byproduct of focusing on controllable elements, or inputs. In the stage 20 time trial of the 1986 Tour, LeMond started 2 minutes 45 seconds ahead of Hinault but suffered a crash and had to stop to make a bike switch. Despite the crash, LeMond put forth a heroic effort and only lost 25 seconds to Hinault, effectively sealing his Tour victory.
This crash was an example of an uncontrollable output. It was an freak accident that, despite his best efforts, LeMond couldn’t avoid. In totality, this negative output didn’t cost LeMond victory as he had emphasized controllable inputs during not only the previous 19 stages, but also through years of focused training.
Preparation creates what we like to think of as a form of process power. Such power is created by focusing on controllable inputs that, over the long-term, compound and yield a repeatable decision making process. We believe that the ability to architect successful input-based process power is one of the most important elements of successful investing and better decision making for life in general.
When decisions are controlled by refined and appropriate inputs, the ability to properly evaluate opportunities becomes easier and repeatable. We don’t submit that quality inputs will always produce successful outputs, but rather that over time the chances of finding and acting on the rare “big ideas” will be increased. Charlie Munger put it best at the 2001 Berkshire Annual Shareholder Meeting when he relayed the following:
“You know the game in our kind of life is being able to recognize a good idea when you rarely get it, and when it is rarely presented to you. And I think that is something that you have to prepare for over a long period. What is the old saying? That opportunity comes to the prepared mind. And I don’t think that you can teach people in two minutes on how to have a prepared mind. But that’s the game.”
The past few years have been remarkable in terms of asset appreciation and the consensus seems to believe that the music may never stop, especially with a vast majority of high growth technology names. While we certainly feel that there are some superb assets, we also remain hyper-aware that the future may not be as advantageous as the past and at some point the music will most likely slow and perhaps even stop. It will be in these more difficult times that having process power as an investor will serve as a differentiating factor, in other words, when the chips are down are you able to remain at the table?
“It is in the spirit of aiming high, we ask you to focus on inputs rather than outputs. It is the rational thing to do. If we were all focused on what can be controlled then that would be something special!
We encourage you to mentally shuffle the surplus from the good years and allocate it to the deficit of the bad years. Especially any future bad years please!” – Nick Sleep
Investors that place their focus on outcomes and don’t center on controllable inputs typically feel immense pain during times of volatility. As mentioned earlier, this agony creates a certain doom loop as investors become increasingly output focused as situations worsen. When this happens, investors feel a strong urge to get out of sub-optimal situations and inject the Novocain of overtrading. On the other hand, investors whom have developed both quantitative and qualitative input-based process power have a much better chance of maintaining stoicism as they assess opportunity.
Brad Gerstner summed it up on his conversation on “Invest Like the Best” when he covered this topic:
“And if you succumb to the ego that is easy to succumb to, which is if I just studied this hard enough, I'll be able to figure it out. And you look at your Bloomberg every day, and you have 100 different opportunities you can invest in every day, or maybe a couple hundred opportunities. People tend to over trade, invest in too many things, it divides their attention. And so the opportunity cost is they are not there when the fat pitch comes or they don't have capital available when the fat pitch comes.”
Our strategy revolves around running a fairly concentrated portfolio. When we find what we believe to be good opportunities we tend to place heavy bets, and it is against these investments that we measure other prospective opportunities. We realize that a few great bets will most likely determine our overall track record, and it is the development and continual refinement of the proper inputs to find these bets that we obsess over.
“And I would say, I stand in a very very long line of investors who have observed over the years that as Buffett says, you only need six punches on your card over the course of your career. For almost all investors, a hugely disproportionate amount of their career profits that they generate whether in public markets or private markets will come from a few bets, a few great investments.” – Stanley Druckenmiller
We are comfortable with our process that produces a few high conviction stock picks. We are able to sleep at night, even during recent nights, since we wholeheartedly agree that we are focused on sound inputs that give us a chance of achieving what we want in this business.
While we maintain a long-term and concentrated portfolio, we do believe there are many strategies that work in the investing game. We are confident in our investment approach, but we also don’t claim it to be superior to other strategies that produce strong results for various types of investors.
What we do believe though, is that our investment strategy is controllable and our focus on the inputs, as opposed to the outputs, make all the difference over time.
Corbin & Grayden, Deliberate Capital